Earnest money is one of the first real dollars a buyer may put at risk when making an offer on a home.
Also called a good faith deposit, earnest money is paid by a buyer to show the seller that the offer is serious. If the sale closes, the deposit is typically credited toward the buyer’s down payment or closing costs. If the sale falls apart, what happens to the deposit depends on the purchase contract, contingencies, deadlines and state law.
That is why buyers should understand earnest money before signing an offer, not after a dispute begins.
Key takeaways
- Earnest money is a buyer deposit that shows serious intent to purchase.
- NAR says earnest money is held in escrow until closing or until a dispute is resolved.
- Earnest money is not the same as a down payment.
- NAR says earnest money deposits commonly range from 1% to 10% of the purchase price.
- Freddie Mac says earnest money typically totals 1% to 5% of the purchase price.
- Buyers may lose earnest money if they miss deadlines, waive protections too early, or walk away for reasons not allowed by the contract.
What is earnest money?
Earnest money is a deposit submitted with, or shortly after, a home purchase offer. The goal is to show the seller that the buyer intends to move forward.
NAR describes earnest money as a good faith deposit paid by a homebuyer to show legitimate interest and intent to close. NAR also says the funds are held securely in an escrow account until closing or until any disputes are resolved.
Freddie Mac describes earnest money as money submitted with an offer before closing to show the seller that the buyer is serious. Freddie Mac also notes that earnest money is not required in every sale, but it may make an offer more attractive.
Earnest money vs. down payment
Earnest money and down payment are not the same thing.
The down payment is the amount the buyer contributes toward the purchase price at closing. Earnest money is deposited earlier in the process to support the offer.
If the transaction closes, the earnest money is usually credited toward the buyer’s down payment or closing costs. If the transaction does not close, the contract determines whether the buyer gets the money back.
How much earnest money do buyers pay?
There is no single national amount.
NAR says earnest money deposits can be any amount and commonly range from 1% to 10% of the home’s purchase price. The amount can depend on market competitiveness, down payment size, contingencies and seller preference.
Freddie Mac says earnest money typically totals 1% to 5% of the purchase price.
The difference in those ranges shows why buyers should ask what is typical in their market. A $5,000 deposit may be strong in one market and weak in another.
When earnest money is refundable
Earnest money is often refundable when the buyer exits the contract through a valid contingency and follows the contract deadlines.
Common protections may include inspection contingency, appraisal contingency, financing or mortgage contingency, title contingency, home sale contingency, or other contract-specific protections.
Freddie Mac says that if contingencies are not met during the closing period, a buyer can still walk away from the sale without losing earnest money.
When buyers can lose earnest money
Buyers can lose earnest money when they walk away for a reason not allowed by the contract or fail to meet contract deadlines.
NAR says that if a buyer interrupts the sale for other reasons, such as waiving contingencies prematurely, failing to meet deadlines or abandoning the transaction, the seller may get to keep the money.
That is why buyers should not treat earnest money as symbolic. It is real money tied to real contract obligations.
How buyers can reduce risk
Buyers can protect themselves by reading the contract before signing, understanding each contingency, tracking every deadline, wiring funds only after verifying instructions, keeping written proof of deposits, asking who holds the escrow and consulting qualified professionals if a dispute appears likely.
Wire fraud is also a risk. Buyers should confirm wire instructions with known parties by phone or in person before sending money.
What this means
Earnest money can strengthen an offer, but it should not be offered casually.
A buyer should understand how much money is at risk, where it will be held, when it becomes nonrefundable and what must happen to get it back.
FAQ
What is earnest money?
Earnest money is a deposit a buyer submits to show serious intent to purchase a home.
Is earnest money required?
NAR says there are no laws requiring earnest money to be attached to a home offer, but it is common in many markets.
How much earnest money should a buyer offer?
NAR says earnest money often ranges from 1% to 10% of the purchase price, while Freddie Mac says it typically totals 1% to 5%.
Does earnest money go toward the down payment?
Usually, yes. If the transaction closes, earnest money is often applied toward the down payment or closing costs.
Can a buyer lose earnest money?
Yes. Buyers may lose earnest money if they miss deadlines, waive protections too early, or walk away for reasons not allowed by the contract.
